Strip out the government and Japanese GDP is going backwards

Our good friend of the Cobden Centre, Sean Corrigan, is a wealth of fresh economic insight. Here in this small piece, he shows us that, if you strip out Government from GDP figures, you actually see what the private, productive sector of the economy is doing.

Sean does this for Japan. It shows that the current GDP recovery that has been reported widely in the press for this country, when you strip out the Government part of the economy, has actually gone backwards for 6 successive quarters. It has retuned to a level not seen since the early 80’s.

Sean is of course quite right to strip out government, as doing a bit of QE here and a bit there will inflate GDP figures for sure, but do little to grow the economy as we have previously explained before in this article . Now government can spend your money as a taxpayer on things that it views to be priority, i.e. transfer payments to the worthy and not so worthy and building cap ex projects such as railways, providing services such as justice etc, but this just redistributes what you as a taxpayer has earned and moves it form A to B.

To be clear nothing new is created from a wealth perspective, as it was already created by you, the taxpayer, to be given to someone else, directed by the government. More than ever, we need to be looking at how the productive sector is performing in all economies and not how the transfer, sector i.e. government, is doing. This is the engine of recovery and not the government side of the economy for the reasons stated.

I hope Sean or one of our readers would like to prepare this data for the UK. I suspect it would show a similar dismal story. In fact, when we hear of all these nations lifting out of the recession, I have a nagging doubt in my mind that this is the case.

The other interesting measure Sean uses is Debt to Private GDP. In Japan it has risen a staggering 28% in 18 months and is now sitting at 237%. In the UK we are told we now have a Debt to GDP ratio of 59%. What do we think it is in the UK? Without doing the numbers myself, I would suspect for us the Debt to Private GDP is over 100% as government is well into the high 40% + range of the economy.

A third insight is the Japanese MI money measure which is 31% up YOY and that correlated, with a time lag to inflation, so beware Japan for the inflationary Tsunami!

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1 Comment

I think current policy of QE is unforgivable, and I am very sceptical of government spending, but I have trouble with the suggestion that government spending cannot — at least in theory — result in wealth creation.

Suppose FooCorp sends their packages by carrier pigeon. This is slow and expensive (pigeons need to be trained and fed, and packages go missing when they fly past hunting grounds). FooCorp realises that they can increase efficiency by investing in a private rail network. The cost savings delivered by the network are greater than the cost of the investment, and FooCorp reaps the rewards. This, presumably, is wealth creation. If so, why is wealth not created if a taxpayer-funded rail network benefits the taxpayers more than it costs them?

As another example, suppose the government spends taxpayers’ money on research into nuclear fusion. If this pays off, it will pay off in a big way. Though the money invested in this research is not freely given, it seems hard to dispute that it *is* investment, and that it *can* produce wealth.

Suppose that rather than confiscating our wealth directly through taxes, the government confiscates it indirectly by printing money. The government spends its new money not on bank bailouts or welfare programs, but instead on the fusion researchers, who eventually deliver cheap power for all UK citizens. Again, it would seem that though the original funds were ill-gotten, the result has been genuine wealth creation.

We should consider the opportunity costs. It is possible that the confiscated original wealth would be put to better use in the private sector. On the other hand, it is possible that rather than investing their money, the taxpayers would blow it on consumables, leaving them without a fusion-powered high-speed rail network.

AFAICT, it is not impossible for governments to create wealth. It is even possible for governments to create more wealth from the same initial funds than the private sector would. It is just extremely unlikely in practice.